UK’s City Link struggles with productivity as losses spiral

UK parcel delivery company City Link has continued to be a “drag” on the financial results of its parent group, Rentokil Initial, as losses spiralled during 2011. The courier firm saw its revenue down 8.5% to GBP 307m for the full year, with its volumes down 3.5% largely thanks to customers lost at the close of 2010.

Last year, the company brought in former Royal Mail chief customer officer David Smith as its new managing director, along with Parcelforce’s finance director Robert Peto to be its finance director, in an attempt to turn things around.

City Link has now stabilised its customer base, having lost 20,000 small ecommerce customers over the past four years, bosses said today.

But the company’s losses for 2011 nevertheless increased more than 200% compared to 2010, down GBP 21.7m to GBP 31.3m for the year.

Competition has seen significant pricing pressures in the parcel market, but Rentokil Initial CEO Alan Brown said flagging productivity levels were the major problem now within City Link, with management failing to engage with employees on the front line, or keep subcontracted couriers up to speed.

The productivity problems saw revenue per consignment falling 5% in 2011, and have meant it generally costs City Link 70 pence more per delivery to operate than its main competitors.

Aiming for 50m deliveries per year, that added up to a “lot of money” being wasted, said the CEO.

Brown said of the company’s current problems: “It’s not structural – it is more about getting productivity out of our individual drivers and warehouse people. The biggest problem is in the area of management of subcontractors, that is where we are losing out in particular.”

Improvement plan

City Link now has a 2012 plan to turn around its business, but the measures could take a few years to fully implement. A big part of the plan involves shaking up the operating culture among employees.

The company is expecting to change as many as half its depot managers as it attempts to address the poor staff productivity levels. Brown said that with competitors laying off workers at the moment, there should be “no shortage of talent” in the market for these positions.

The big change for its subcontractors would be moving to pay them by volume delivered, rather than for time spent delivering items, Brown said.

Since 2008, when City Link initiated its previous turnaround plan, the company has made some progress, Brown insisted today, including a reorganising of its IT network so that, for example, three vehicles no longer attend the same street for different deliveries on the same day.

The firm’s operational network has also been reorganised and downsized from 94 depots to a single centralised hub and about 69 depots. This year, the number of depots should fall to around 65.

The new improvement plans for the company should be 70% implemented by June, Brown said, with the result that losses would continue for the first half of 2012, with financial performance picking up in the second half.

B2C market

City Link, which has its head office in Coventry, sees itself as one of the big four private sector parcel delivery firms in the UK for the increasingly important business-to-consumer segment, along with Yodel, DPD and Hermes.

Despite the major change in corporate culture needed among City Link employees, Brown said there were still opportunities to grow in the courier business.

The company’s CEO said the market in the UK was currently faced with a major problem in the inflexibility of its capacity through the year.

While there is generally overcapacity in the market for most of the year, causing big pricing pressures for parcel companies, there is not enough capacity for the record levels of parcels being delivered in the Christmas period.

“Christmas was generally favourably impacted by good weather conditions, but service levels provided by some of the competition was really marginal, and we would see that some of our competition will continue to struggle to manage their operations going forward,” said Brown.

The City Link CEO said retailers would have to accept that prices within the B2C deliver market would soon have to go up. City Link is looking to increase its prices by 3%, looking at competitors aiming for price increases of around 5%.

“The longer term outlook for this market looks structurally promising, but there has to be a rebalancing of the negotiating position in particular between the courier industry and some of their customers, because the prices just aren’t economic,” said Brown.